Amid a consumer environment still in a recovery phase, Yum China has continued its growth strategy of expanding its physical footprint to capture market share. In the first quarter of 2026, the company achieved a net addition of 636 new stores, completing over one-third of its full-year store opening target and significantly accelerating its expansion timeline. Franchisees contributed 42% of the net new store openings for both KFC and Pizza Hut, establishing themselves as a crucial force in penetrating lower-tier markets and new consumption scenarios. Driven by this scale expansion, Yum China's system sales increased by 4% year-over-year this quarter, with operating profit growing by 6%. The operating profit margin improved by 20 basis points compared to the same period last year, marking the eighth consecutive quarter of simultaneous growth across these three key metrics. Same-store sales for the first quarter were essentially flat, reported as 100% of the prior year's level according to the disclosed metric. Performance in January and February met expectations, while March fell slightly short. This was attributed to demand fluctuations caused by the timing of holidays and the high comparative base from last year's intensive IP marketing campaigns. By brand, KFC's same-store sales increased by approximately 1% year-over-year, with its restaurant margin remaining at a relatively healthy level of 19.1%. Pizza Hut continued its recovery from a high base in the previous year, with operating profit growing 18% year-over-year, driving its restaurant margin up to 15%. The average check size decreased by 5%, aligning with its strategy to emphasize value-for-money offerings for the mass market and gradually move towards its long-term target range of 60 to 70 yuan. In an environment characterized by weak demand and heightened price sensitivity, Yum China is seeking new growth pillars through the expansion of store formats and consumption scenarios. Modules such as KCOFFEE and KPRO, which operate alongside main brands, are seeing sustained volume growth. By the end of the first quarter, KCOFFEE had surpassed 2,600 locations and KPRO exceeded 280 locations, contributing mid-single-digit and approximately 20% sales lifts to their parent stores, respectively. These modules leverage existing store resources to capture incremental demand in high-frequency occasions like breakfast and light meals. Concurrently, Pizza Hut is accelerating its penetration into lower-tier markets through its WOW model, entering over 100 new towns in the first quarter. The "Twin Stars" model, which combines KFC and Pizza Hut under one roof, added nearly 80 new locations during the quarter, primarily operated by franchisees in lower-tier cities, further enhancing the efficiency of its channel expansion. Leveraging franchisee resources, the company is also exploring new consumption scenarios. With rising car ownership and an improved highway network, "on-the-go" consumption locations like highway service areas have become a significant source of growth. Yum China has signed cooperation agreements with more than ten provincial and municipal transportation investment platforms, adding nearly 100 stores in just over a year, with plans to further accelerate this expansion within the current year. If store expansion and scenario diversification are the primary supports on the revenue side, changes on the profit side are more influenced by the structure of delivery services and base effects. Delivery services have become the most significant variable affecting current profitability. In the first quarter, the contribution of delivery sales to total sales increased to 54%, up from 42% last year, making it a key engine for transaction volume growth. However, this has been accompanied by a notable increase in rider costs and fulfillment expenses. Financial reports indicate that Yum China's restaurant margin decreased by approximately 40 basis points year-over-year in the quarter, with delivery-related costs being a primary drag. The value-for-money product strategy also contributed, to some extent, to compressing margin space. Management has not shied away from this issue. They explicitly stated during the earnings call that delivery remains a long-term trend, but cost pressures from riders will persist in the short term. However, marginal changes are emerging. The company has observed that competition among delivery platforms is becoming more rational. Subsidy reductions are primarily concentrated on small-value orders, with subsidies for large-value orders seeing only a slight decline. This shift makes platforms more inclined to promote higher average check size orders, which is relatively favorable for Yum China. Against this backdrop, the company emphasized it will continue to pursue a "disciplined growth strategy," seeking a balance between sales scale, profit margins, and its pricing architecture. Looking ahead to the second quarter, management anticipates a sequential improvement in same-store sales and expects to achieve a 14th consecutive quarter of same-store transaction growth. Through rent optimization, operational efficiency improvements, and cost control, the operating profit margin is projected to be roughly flat compared to the same period last year, although the restaurant margin may still experience minor fluctuations. Entering the second half of the year, as the high base from last year is gradually absorbed and the structure of delivery services stabilizes, the year-over-year pressure from rider costs is expected to ease marginally. For the full year, the company maintains its existing guidance: a same-store sales index of 100-102 and system sales growth in the mid-to-high single digits.
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